I write on white-collar crime and how seemingly good, smart people are capable of doing the dumbest things. I am also interested in covering the consequences of these crimes and to provide a perspective that is much different than the mainstream stories on crime. Since 2003, I have presented my personal story of white-collar crime to universities, the FBI, various professional societies and corporations around the world. I co-authored "Stolen Without A Gun" with Neil Weinberg, former Executive Editor Forbes Magazine (now Editor at American Banker). On a good day, I'll be writing for Forbes or speaking to a business audience.

Inside Trader Matthew Kluger's 12-Year Prison Term Affirmed

On June 24th, Raj Rajaratnam’s 11-year prison term was affirmed by the 2nd Circuit and last week the same appellate court upheld the prison sentences of three others convicted of insider trading (Michael Kimelman (30 mths), Zvi Goffer (120 mths) and Craig Drimal (66 mths)). All of those gentlemen went to trial and were convicted. However, an insider trading case in New Jersey involving three men resulted in three guilty pleas ahead of trial … but the prison sentences for two of the men, Matthew Kluger (12 years) and Garrett Bauer (9 years) were two of the most lengthy for insider trading in U.S. history. Today, the 3rd Circuit affirmed the Kluger sentence and last week it did the same with Bauer’s sentence.

The prison term given to Matthew Kluger by U.S. District Judge Katharine Hayden (New Jersey) represented the longest ever given to a person pleading guilty to charges of insider trading. Upon his arrest in April 2011, Kluger quickly decided to enter negotiations to plead guilty and throw himself on the mercy of the court. That strategy landed him in prison for 12 years.

Kluger was a lawyer (NYU Law) who worked on mergers and acquisitions of publicly traded companies at prestigious law firms, including Wilson Sonsini GoodrichGoodrich & Rosati PC. He then passed that confidential information on to a middle man (Kenneth Robinson), who then passed it on to a trader, Garrett Bauer. The scheme worked for 17 years because there was no direct communication between Kluger, the source, and Bauer, the trader. In fact, the two had only met once at the beginning of their illegal trading. The Securities and Exchange Commission had suspicions of Bauer’s trading activities but could never tie him to a source for the information. However, when Bauer backed out of the trading scheme in 2010, Robinson and Kluger continued … that was when the SEC and the FBI pulled everything together. As David Voreacos (Bloomberg) noted in his excellent profile of Kluger, the scheme succeeded for so long because of its simplicity, the discipline of its limited number of people and its essential amoral nature.

The basis of Kluger’s appeal was that Bauer was supposed to buy only small number of shares. to avoid detection from authorities, and then the three would equally share in the profits. However, Bauer, unknown to Kluger, was trading large blocks of shares for his own benefit, resulting in millions in profits. Whereas Kluger believed that the profits were just around $2 million (a little of $600k each), the total profits from the information he provided to the conspiracy approached $37 million with Bauer receiving the majority of the money. Kluger was sentenced by Judge Haydan according to the Federal Sentencing Guideline based on the amount of the total gain and not the amount he personally realized from the trades. His guideline range at sentencing was 11-14 years … so 12 seemed fair to the judge.

The 3rd Circuit agreed with Judge Hayden, stating that Kluger, “… truly was a career criminal.”

Upon being notified of the decision, U.S. Attorney Paul J. Fishman (District of New Jersey) released a statement, “We argued at sentencing that a severe penalty was appropriate for one of the longest running insider trading schemes ever prosecuted, and are gratified the Court of Appeals saw it the same way.”

Kenneth Robinson, who recruited Bauer and hatched the initial plan with Kluger, did not appeal his prison term of 27 months. Robinson was the first to cooperate with authorities and recorded conversations with both Bauer and Kluger, which sealed their fate. Note to file; It pays to cooperate early.

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What drove Kimelman’s sentence, as much as it did Klugers, was the amount of money involved in a particular trade. Kimelman’s was just a few million, while Kluger’s were over $30 million. Same act, different amounts involved. Also, Kluger had an obstruction charge and he was in a position of trust (lawyer at M&A firm) … these additions mean more time in prison. It should be noted, the government offered Kimelman NO JAIL TIME if he pled guilty (probation only). However, he took his chances at trial and, well, you see how that worked out for him. Thanks for your question.